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401K early withdrawal

Asked Jun 18, 2006, 03:31 PM — 15 Answers
I have a 401K question about early withdrawel. Actually, let me give you a scenario:

401K balance - $28000.00

I have the understanding that 20% is immediately taken out for federal taxes with an early withdrawel, which would be in this case $5600.00, and that would make the distribution check $22400.00... Corrrect?
My questions are these:
When does the10% penalty come into play?
Is it 10% of the total balance?
Is the penalty taken out of your refund?
Are there additional taxes - for instance, when I do my takes next year, do I have to add $22400.00 or even the full $28000.00 to my income, and get taxed on it again?

In a nutshell, I would like a breakdown of early withdrawel on 401K with a $28000.00 balance. If I decide to do it, I want to know how much to put back so I don't get caught off guard when tax time rolls around. Can you help me out here?

Thank you so much!

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15 Answers
shunned's Avatar
shunned Posts: 270, Reputation: 99
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#2

Jun 18, 2006, 08:16 PM
The 10% penalty comes off the top before taxes.
I think I had Schwab when I did this and they cut me a check with the taxes and penalty already taken out.
Talk with the place you have your 401K as I'd bet they would have the exact answer.
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ScottGem's Avatar
ScottGem Posts: 58,000, Reputation: 28105
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#3

Jun 19, 2006, 06:18 AM


As shunned indicated you should be talking to the benefits adminstrators at your company. The 20% withholding is just that, a withholding. Its NOT the extent of your tax liability, just like what's being withheld from your paycheck is not the exact amount you pay.

My question is have you explored a loan rather than a withdrawal? Mosy 401K plans have a load provision. The kicker is that the interest you pay goes right back into your account. Essentially you are borrowing from yourself and paying yourself interest. So instead of a penalty and a tax liability, you actually increase the value of your investment.
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ripvonboomer's Avatar
ripvonboomer Posts: 2, Reputation: 1
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#4

Jun 19, 2006, 07:47 AM
The company I worked for shut the doors in April. We have to cash out or roll over. I was contemplating this to get out of a car payment for the next 5 1/2 years. I'm not set on withdrawing it... It's just a thought at this point. I really appreciate the responses. Thanks!
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ScottGem's Avatar
ScottGem Posts: 58,000, Reputation: 28105
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#5

Jun 19, 2006, 08:15 AM


You need to look at the cost of a car loan. Over the term of the loan how much will you be paying in interest? During the same amount of time, how much will the rollover of this money earn in interest. Now add in the 10% penalty and the tax implication. I would be very surprised if taking out a car loan doesn't work out better.
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fredg's Avatar
fredg Posts: 5,001, Reputation: 3542
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#6

Jun 19, 2006, 08:16 AM
Hi, rip,
If you can, please roll it over! You will save much in taxes at a later date.
Yes, If you withdraw it, get the check in your hand, then 10% comes off before the check is written. Then, 20% comes off for Federal Taxes, before the check is written. Then, if you have a State Income Tax, have an additional 4% (possibly, could be more or less) taken out for the State.
That will be a total of about 34% you will never see !
When it comes time to file your taxes for this year, you DON'T have to pay the Federal and State taxes again. But, you will have to file a form with all the information from your company, about how much was already taken out from your 401k.
Later on in your life, your taxes will be less, especially when you retire. You could save a whole lot of money on taxes by rolling it over, to maybe an IRA account with your local bank.
Talk with your bank about it, and then you can make a better decision.
Best of luck.
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wompoo dove's Avatar
wompoo dove Posts: 2, Reputation: 1
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#7

Jul 24, 2006, 01:45 PM
Quote:
Originally Posted by ScottGem
As shunned indicated you should be talking to the benefits adminstrators at your company. The 20% withholding is just that, a withholding. Its NOT the extent of your tax liability, just like what's being withheld from your paycheck is not the exact amount you pay.

My question is have you explored a loan rather than a withdrawal? Mosy 401K plans have a load provision. The kicker is that the interest you pay goes right back into your account. Essentially you are borrowing from yourself and paying yourself interest. So instead of a penalty and a tax liability, you actually increase the value of your investment.

Hi there...

I was wondering if you knew if a Roth IRA also has a provison so that I can borrow against it along with my what you have labeled here as a "load provision" for the 401K...

I would combine the 2 to obtain a downpayment for land to build on if this was possible.

Many thanks for any advice or comments!

Cheers

Don Kimball
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ScottGem's Avatar
ScottGem Posts: 58,000, Reputation: 28105
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#8

Jul 25, 2006, 06:28 AM


Sorry that was a typo, should have been loan provision.

Sorry, I'm not that familiar with Roth IRAs to know whether they have a loan provision. I would tend to doubt it since they are self managed. But you can easily find out by asking the institution that the account is deposited with.
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wompoo dove's Avatar
wompoo dove Posts: 2, Reputation: 1
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#9

Jul 25, 2006, 09:36 AM
Quote:
Originally Posted by ScottGem
Sorry that was a typo, should have been loan provision.

Sorry, I'm not that familiar with Roth IRAs to know whether they have a loan provision. I would tend to doubt it since they are self managed. But you can easily find out by asking the institution that the account is deposited with.
Scott I would love to know if my 401K offers a loan provision. Is there any obvious way to find this out or do I need to contact the institution itself?

Thanks so much

Don Kimball
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ScottGem's Avatar
ScottGem Posts: 58,000, Reputation: 28105
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#10

Jul 26, 2006, 05:18 AM
Almost all 401Ks do. The easiest thing is to contact the Benefits department or plan administrator. You should have some sort of plan document that states the provisions.
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